Yale ICF Working Paper No. 04-19 July 26, 2004

WILL HISTORY RHYME? THE PAST AS

FINANCIAL FUTURE

William N. Goetzmann Yale School of Management

This paper can be downloaded without charge from the Social Science Research Network Electronic Paper Collection:

http://ssrn.com/abstract=560024

Will History Rhyme? The Past as Financial Future1

William N. Goetzmann Yale School of Management

July 26, 2004

Abstract History demonstrates that global capital markets can contract as well as expand. A long-term view of finance suggests that we should prepare for periodic segmentation as well as integration of markets in the 21st Century. Anti-capitalist ideologies have historically been the vectors of attack on the cross-border flow of capital, however the fundamental cause may actually be domestic hostility towards foreign ownership and control. The roots of the conflict between domestic interests and foreign investors may be inherent in global equilibrium models. In a frictionless capital market, foreigners will always own a greater proportion of a small economy’s assets. By the same token, domestic investors in small economies will always seek to export most of their capital. This equilibrium is at odds with a stable condition of national ownership and control of assets. JEL: N23, N24, F3 Keywords: Imperialism, International Finance, Diversification

1 An opinion piece written in response to a request for a brief essay on the future of finance. All errors are the responsibility of the author. Thanks to my colleagues Zhiwu Chen, Doug Rae, Matthew Spiegel and editor Peter Bernstein for helpful comments. For a current version, please contact William N. Goetzmann, Yale School of Management, 135 Prospect Street, New Haven, CT 06511. E-mail william.goetzmann@yale.edu.

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A View from the Past No exercise in futurism can afford to ignore the lessons of history. As we look

forward and consider the future development of capital markets, one key question is

whether the 21st century will resemble its predecessor. The close parallels between world

finance 100 years ago and world finance today suggest that the past might help us prepare

for events to come.

The turn of the 19th Century is widely regarded as the first great age of

globalization.i The future of financial markets at that time must have seemed limitless.

Then, as now, markets were expanding, barriers to capital flows were low and businesses

could tap vast pools of investor wealth through the public capital markets. Thousands of

different issues of stocks, bonds, options and futures were traded on large, well organized

global exchanges in the major European capitals of London, Paris and Berlin. Further

afield, securities exchanges and sophisticated banking institutions existed in cities like

New York, Hong Kong, Shanghai, St. Petersburg, Tokyo and Buenos Aires, to name only

a few. Indeed, by 1904, there were active stock and bond exchanges in at least forty

countries around the world, and European investors were being urged by experts to

internationally diversify their portfolios.ii

In Table 1, an empirical study of the securities issued on the world’s exchanges in

1910 (from an unlikely source) shows Britain, U.S., France and Germany as the dominant

money markets, but other European nations comprised a significant share of world

finance as well.

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Table 1iii

FINANCIAL SECURITIES CURRENT IN 1910(000,000,000 francs)

Great Britain 142 Holland 12.5United States 132 Belgium 7.5

France 110 Spain 7.5Germany 95 Switzerland 6.25

Russia 31 Denmark 3.75Austria-Hungary 24

Italy 14

Japan 12

Sweden, Norway,

Rumania,etc.

2.5

(Source: V. Lenin, 1917, Imperialism: the Highest Stage of Capitalism)

Then, like today, investors relied upon quantitative research as an aid to portfolio

construction. Guides like Henry Lowenfeld’s Investment, an Exact Science (1909)

demonstrated to British investors how a well-diversified global portfolio could reduce

risk. Figure 1 is taken from his book. It charts the individual prices and dividends of

each of ten securities drawn from around the world. Despite dramatic individual security

price movements over the period 1897 to 1906, Lowenfield’s diversified portfolio

(labeled in the graph) remained remarkably stable. The implication was that international

investing made your nest egg safer. This global investing approach was not limited to

Britain. On the continent, Rudolph Taüber’s (1911) Die Börsen der Welt, showed

German investors how to access global equity markets as well.

Faith in the capital markets as a mechanism for savings made possible an

unprecedented burst of infrastructure development extending throughout North America,

South America, Asia and Africa -- all financed by the massive export of capital from

French, British and German investors seeking returns and diversification through cross-

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border investment. The number of securities listed on the Stock Exchange of London in

1900 demonstrate the sheer magnitude of opportunity. The June, 1900 volume of The

Investors Monthly Manual, a comprehensive list of the Exchange, contains prices for

9,250 individual securities. Roughly half of these were foreign or colonial obligations.iv

To get an informal sense of the reach of British foreign investments at the time,

think of the lyrics to “Fiduciary Fidelity Bank” from the musical Mary Poppins. A song

to lure a child into an investment of two-pence goes, in part:

…you'll be part of Railways through Africa, Dams across the Nile, Fleets of ocean greyhounds, Majestic, self-amortizing canals, Plantations of ripening tea… Bonds! Chattels! Dividends! Shares!, Bankruptcies! Debtor sales! Opportunities! All manner of private enterprise! Shipyards! The mercantile! Collieries! Tanneries! Incorporations! Amalgamations! Banks! v

A more serious commentator on this period of financial expansion, Pulitzer-Prize-

winning historian Herbert Feis called turn-of-the-century Europe “The World’s Banker”

and noted close connections between the world of finance and the world of diplomacy.

In his view, the global financial architecture of the time depended on the expansion of

national interests and shareholder protections to distant countries – an expansion

facilitated by colonial or semi-colonial rule. The British colonization of Egypt, for

example, resulted directly from a financial “workout” in the 1870’s of the Ottoman

Khedive’s enormous debt – a workout that included foreign control of domestic revenue

sources. In part through similar financial processes, the entire world was ultimately

carved up into a few major colonial empires.

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Contraction

The first blow to global financial architecture in the young 20th Century was a war

of surpassing scale. World War I drained European investment coffers in a few short

years, shutting down the world stock markets for many months and ultimately crippling

the once-dominant London Exchange.

The second blow was ideological. In 1917, a political backlash against

international finance culminated in the repudiation of international debts by the

Bolshevik government in Russia, as well as introducing a vast nationalization of industry

and the virtual elimination of property rights on which the foundations of financial claims

rested. Surprisingly, the financial markets in Russia and the world’s capital markets did

not seriously anticipate the magnitude of the reversal of fortune that awaited. Like many

capital markets, the St. Petersburg Exchange was closed from 1914 to early 1917. When

it opened in February of that year, Russian share prices were significantly higher

(correcting for inflation) than when the market had closed in 1914. However, that was its

final fluorescence. The Russian market shut down the following month due to political

upheaval and did not re-open for more than seventy years.vi

The Bolshevik Revolution in Russia was the beginning of the deconstruction of

the integrated global economy, and it was only the first of many catastrophic ruptures.

The post-World War I period will be long be remembered as an era of protectionism

enforced by rising tariffs, the erosion of the gold standard, the appearance of hyper-

inflation, and the emergence of fascism in Europe which, among other things, sought to

enable a strong, nationalistic government to marshal the power of business and industry

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to its designs. By 1930, The Economist simply stopped publication of its comprehensive

statistical supplement, The Investor’s Monthly Manual. Markets themselves began to

close in the 1930’s and 1940’s. Hyperinflation shuttered the exchanges in Germany,

Hungary and Greece for much of 1931 and 1932. Spanish markets closed from 1936 to

1940 due to war. From 1938 through 1941, most continental stock markets closed

intermittently, and when they were open, prices were sometimes sharply regulated by the

government.vii Virtually all of the Eastern European markets closed for good at the end

of World War II. Although many South American markets remained open, the real

economic returns to investors in equity markets such as Chile and Peru were both poor

and volatile.

After the Soviet Union extended its political sphere to Eastern Europe, and China

ultimately consolidated under a Marxist government in 1949, the world was effectively

divided over the question of whether finance was a force for great good or great evil.

After mid-century, Arab Socialism effectively nationalized Egyptian industry and

Marxist-Socialist revolutions in Cuba, Chile and Portugal cut these nations off from the

economic freedoms provided by world capital markets in favor of localized and intrusive

governmental control. In just a few decades, the world capital markets had gone from a

Golden Age to the Dark Ages.

Did nineteenth century financiers recognize the signs of an impending global

backlash to financial expansion in the early years of the 20th Century? Criticisms of

capitalism were legion in the era following the publication and translation of Karl

Marx’s Das Kapital (1867 and ff.). Two of the most important rebukes to the global

expansion of financial markets were John A. Hobson’s (1902) Imperialism: A Study, and

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Vladimir I. Lenin’s (1917) Imperialism: The Highest Stage of Capitalism -- the first by

an economist the second by a revolutionary. The former developed a shrill ideology and

lexicon around anti-imperialism which remains largely intact in academic discourse today.

In the latter, however, Lenin often let the facts and figures of global financial expansion

speak for themselves. What we now read as evidence of financial progress Lenin

viewed as prima facia evidence of exploitation. The book is filled with tables

documenting European foreign investment. For example, Table 2 estimates the growth

in foreign investment by Great Britain, France and Germany from 1862 to 1914. Table 3

shows the geographical distribution of the three countries’ capital in 1910.

Table 2

CAPITAL INVESTED ABROAD (000,000,000 francs)

Year Great Britain France Germany1862 3.6 — — 1872 15.0 10 (1869) — 1882 22.0 15(1880) ? 1893 42.0 20(1890) ? 1902 62.0 27-37 12.5 1914. 75-100.0 00 44.0 (Source: V. Lenin, 1917, Imperialism:

the Highest Stage of Capitalism)

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Table 3

DISTRIBUTION (APPROXIMATE) OF FOREIGN CAPITAL IN DIFFERENT PARTS OF THE GLOBE

(circa 1910 in 000,000,000 marks) Britain France Germany Total

Europe 4 23 18 45 America 37 4 10 51

Asia, Africa, and Australia 29 8 7 44

Total 70 35 35 140 (Source: V. Lenin, 1917, Imperialism:

the Highest Stage of Capitalism)

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Lenin interpreted these tables as evidence of a new stage in the development of

capitalism. In his words, “Typical of the old capitalism, when free competition held

undivided sway, was the export of goods. Typical of the latest stage of capitalism, when

monopolies rule, is the export of capital.” In Lenin’s view, this export of capital had

become a “… basis for the imperialist oppression and exploitation of most of the

countries and nations of the world, for the capitalist parasitism of a handful of wealthy

states!” Of course foreign investors did not see it this way. They found it difficult to

believe that such extreme views of capitalism could actually prevail. For example, in

December, 1917, at the London annual meeting of the venerable Kyshtim Mining

Corporation, a major copper concern in the southern Urals, board member Leslie

Urquhart assured shareholders:

As to the question of how the vital interests – that of the ownership of our properties – are likely to be affected by the happenings in Russia, I would say as definitely as I possibly can that the statements of the absurd Bolshevik usurpers as to the repudiation of contracts should not be taken seriously; they are the ravings of crazy men … are all of these people going to give up their heredity and private ownership rights in order to satisfy the socialistic ravings of madmen and the greed of the landless proletariat of the towns? … I have a passionate certainty of conviction that all this chaos and anarchy in but the cleansing fire which will get rid of all that is rotten and make Russia purer and greater (hear, hear).viii

Urquhart’s fiery speech put a brave face on investors’ plight. No dividends had been paid

on Kyshtim for years, and the annual accounts were unavailable to shareholders due to

the revolution. Remarkably, investor expectations in 1917 may have coincided with

Urquhart’s optimism. The trading range of Kyshtim stock had remained relatively stable

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between 2 ¾ and 1 ½ through the years 1915 through 1918, after which it ceased to be

quoted.

We Have Come a Long Way – Back to the Past

Although Lenin may be turning over in his tomb, we have now finally regained

the scale and scope enjoyed by the international financial capital flows of a century ago.

Virtually all of the states that “seceded” from the global financial markets in the 20th

century have returned in one way or another, even though our financial architecture is

much different now from what it was in 1904. We are no longer configured as a set of

colonial empires and international financial trusts. While “money center” markets like

the NYSE are growing in importance as sources of capital through direct listing, in our

politically segmented, post-colonial world, many countries have developed their own

internal capital markets with domestic exchanges, securities laws and regulation.

International institutions like the World Bank and the IMF now serve as a buffer

between debtor and creditor nations and interrupt the dynamics that led in the past to the

compromise of national sovereignty. Indeed, some of the very problems of “unfettered

capitalism” decried by Lenin were corrected in the 1930’s in the United States and other

countries with the evolution of anti-trust laws and financial market regulation.

Today, an increasing number of people have a stake in the continued expansion of

the capital markets. In particular, finance is a growing portion of the U.S. economy.

According to government statistics, the FIRE (Finance, Insurance and Real Estate) sector

of the economy grew from 13% of U. S. gross domestic product [GDP] in 1959 to 21%

of GDP in 2002, roughly doubling its share of national employment.ix This expansion

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of the financial sector may lead to a greater, broad-based commitment to its success, at

least in the U.S. At the same time, it is difficult to gauge the penetration of the financial

industry in emerging markets. The rapid emergence of a professional class in China and

the growth of Shanghai as a financial center suggest that the U.S. trends are international,

even though China’s recent policies have sought to re-direct growth towards other sectors

of the economy as well.

Will History Rhyme?

Will all of the modern, structural changes to the global financial sector prevent a

backlash of the kind experienced in the early 20th Century? As Russia and China appear

poised to re-enter the global financial community, can we really say that the structural

collapse of global finance after World War I could not happen once again in the 21st

Century? Might there exist a fundamental contradiction between the prerogatives and

imperatives of the modern nation-state and the motivation by investors to transcend

borders? To answer this question, it is worth considering whether the factors that led to

the attack on financial capitalism are no longer a threat.

The near-complete rejection of Marxism-Leninism in Russia in the last decade,

and the more gradual but persistent erosion of anti-capitalist rhetoric in China over the

same period suggest that the century-long ideological attacks on capitalism and financial

markets may have finally abated. The reasons for this are clear. Capital is a necessary

input to economic development, regardless of ideology. Indeed, modern Chinese leaders

do not regard the listing of Chinese company shares on the New York Stock Exchange as

incompatible with their policies. In light of this, it is worth considering the possibility

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that Marxist ideology was not the sole cause of the anti-capitalist revolutions around the

world. Instead, one might argue that the rejection of capitalism in Russia in 1917 and

China in 1949 was not due to their failures in international capital markets but rather due

to their success in attracting foreign investment. This logic would imply that foreign

investment may plant the seeds of nationalistic expropriation.

Another look at The Russian and Chinese Experiences

Consider the success that Pre-Revolutionary Russia enjoyed in tapping external

capital for development. Although Lenin railed against external control of the Russian

banking system, the fact is that foreigners around the turn of the century were nearly

falling over themselves to invest in Russia. Twenty-five percent of France’s foreign

investment in 1914 was in Russia alone. The foreign ownership of Russian debt grew

from 30 percent in 1985 to 48 percent in 1914. Feis estimates that by 1914, 1/3 of

Russia’s private enterprise was financed by French investors, ¼ by British investors and

1/5 by German investors. Even if this is an over-estimate, if anything close to 80 percent

of private Russian enterprise was financed abroad, it would seem to have engendered a

powerful nationalistic incentive to reclaim assets from foreign capitalists.

The motivation for China’s first revolution in 1911 is also instructive. Since the

beginning of the century, China had been remarkably successful in attracting foreign

funding for domestic railroad development. Her loans were widely sought for issuance

by international syndicates of investment banks and cross-listed on all the major

European exchanges. Thanks to the globalization of financial markets, in the span of

about 20 years, China had built much of her modern railway system.

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However, there were strong negative domestic reactions to sourcing external

capital, and to the extra-territorial concessions required to do so. In particular, large-scale

public protests were sparked by Imperial capitulation to foreign financial institutions

associated with the issuance of the Hukuang Railway loan of May, 1911. Chinese not

only resented the terms of the contract but also the preferential rights and treatment

accorded foreign rail companies compared to those given to firms controlled by domestic

investors. The Imperial government fell within a few months of the event. Negative

stereotypes of capitalism have a long life. The revolution that brought the current

Chinese government to power adopted much of the same anti-capitalist and anti-foreign

investment rhetoric of the 1911 revolution.x

Lessons for the Future of Finance

It is easy to interpret the expansion and contraction of markets in the 20th Century

as the result of an on-going struggle between capitalism and communism. However this

does not entirely capture the more fundamental conflict between foreign and domestic

stakeholders apparent in both the Russian and Chinese revolutions. Although both China

and Russia today have begun to embrace forms of capitalism, this trend may still mask an

inherent resistance to foreign ownership or claims upon domestic enterprise. With the

demise of Marxism we might expect to see the rise of alternative ideologies that align

domestic antagonism against external capital.

Consider, for instance, the Islamic Revolution in Iran which nationalized large

parts of Iran’s industry in 1979 – with foreign ownership falling victim to national

interests. The once vibrant stock market in Tehran languished until the mid-1990’s when

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Iran sought to rejuvenate it as a source of financing. Fearful of foreign control, only

recently has it allowed significant foreign ownership of corporations. While not a

Marxist revolution, the rejection of foreign influence in Iran had the same effect of

removing the economy from the global financial markets on ideological pretext.

The financial lesson of the Islamic Revolution in Iran is that extremist rejection of

international investment and financial institutions continues into modern times in

different guises. When it happens, events can move rapidly and with little warning of

their ultimate magnitude. While such withdrawals from the international financial

network can be reversed, healing happens slowly, fitfully and with a difficult process of

institutional re-adaptation. Never the less it is heartening to see that Iran has begun to

follow China’s lead in privatization, and is willing to allow limited international

ownership of shares in domestic corporations.

Financial Perspective

One of the most insightful theories in modern finance is the Capital Asset Pricing

Model [CAPM]. Although stylized and dependent upon many restrictive assumptions,

the CAPM has sharp predictions about portfolio investing and the ownership of assets in

an ideal world. Assuming frictionless capital markets in which claims on all assets can

be freely traded, and in which there are no competitive informational advantages, the

CAPM implies that all investors will hold the same diversified portfolio of the world’s

assets with portfolio weights based upon each asset’s market capitalization.

This means that investors in the United States will hold a significant portion of

their portfolios in U.S. stocks, while investors in, say, Somalia, will export nearly all of

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their capital. From the point of view of a small economy, most investors will be foreign

investors, because the composition of the investor base of any stock will be proportional

to the relative wealth of world investors. Few, if any, countries will have their assets

owned predominantly by domestic investors. In a CAPM world, all countries would find

Bill Gates to be their largest investor, but of course even he would not have enough of a

stake to exert personal control. Interestingly, this equilibrium is not driven strictly by

modern theory, but rather by the investor’s very real motivation to pick each new

investment based on how it will affect the risk of the portfolio. This is the very

motivation that inspired Henry Lowenstein’s 1909 recommendation of a geographically

diversified array of international securities.

What is the Problem?

Like many theories in economics and finance, the CAPM has some often

overlooked political implications. If one believes that businesses should act in the

national interest rather than in shareholder interests, the CAPM in an international setting

presents a problem. The stake-holder view of corporations is that they exist to provide

positive externalities such as jobs or infrastructure. xi To the extent that domestic

ownership of corporations will make these positive externalities more likely, the CAPM

world is not necessarily an attractive one to citizens of a state. In the CAPM world,

domestic investors keep exporting their capital overseas, despite local development

needs, and investors willing to invest locally have no personal stake in domestic social

and environmental conditions unless they affect financial claims. For the most part, the

ideal, diversified investor portfolio in a CAPM world cuts across national boundaries and

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ignores government. Although international versions of the CAPM modify this

conclusion somewhat – particularly when exchange rate risk comes into play, it remains a

broad equilibrium theory about all the world’s investors and all the world’s assets. As

such, the CAPM predicts that investors’ interests will always be in conflict – or at least

orthogonal – to many of the interests of the nation-state.

While we never expect to achieve those ideal, theoretical conditions under which

the CAPM holds in the world economy, the historical processes of globalization suggest

that as transparency and investors’ legal recourse increase and barriers and frictions

preventing cross-border capital flows decrease, investors tend to behave as predicted by

the theory. They broaden their international investment portfolios and diversify their

holdings. The increasing number of foreign corporations listing on U.S. exchanges over

the past two decades bears this out.

The globalization of investment during periods of liberalization may be reason for

caution. History suggests that it is precisely at the point when barriers to capital flows

are lowest that religious fanaticism and xenophobic resistance to foreign capital can

emerge, and ideological arguments and caricatures of capitalism may be used to

generate antagonism against financial markets and institutions.

Conclusions

My personal views on the future of finance? Like the famous forecast of the

stock market, I expect it to fluctuate. If history is a guide, we should expect the capital

markets to enjoy periods of great success. These markets bring investors, firms and

governments closer to an equilibrium characterized by positive rates of return on

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investment, along with a supply of liquid capital. Open access to capital brings with it a

dramatic reduction in risk to individual savers through extended international

diversification. We are in such a period now, and I hope it will continue for a long time.

The positive policies on stock markets and on cross-border listing of securities from

governments traditionally hostile to capitalism and foreign investment are a cause for

optimism, and yet it remains to be seen whether governmental enthusiasm for

liberalization is shared by individual citizens and domestic interests. To the extent that

the openness of capital markets around the world increases local opportunities for

domestic entrepreneurship and domestic investor diversification in all of the world’s

markets, modern globalization has a long future.

On the other hand, the nature of humanity is mistrust of outsiders and jealousy of

other’s good fortune. Thus, the greatest risks of financial contraction arise in periods of

expansion. Given that the past 20 years have seen nearly an unprecedented interval of

financial liberalization around the globe, characterized as much as anything by cross-

border investment but also by rising inequality in developed nations like the U.S., I

expect we will face calls to reign in global financial markets in the near future.

What form might this take? Consider the rhetoric following the Asian currency

crisis of 1997. Recall Malaysian Prime Minister Muhatir Mohammet’s xenophobic

speeches, the blame upon international hedge fund managers for the crisis, and the tacit

acknowledgement by even some leading economists that shutting the borders to

investment might really be a good thing after all. We will hear the same kind of things

after another shock to the financial system, and if this rhetoric gets mixed together with a

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popular political or religious ideology, we might see real global financial contraction

once again.

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References Bordo, Michael, Alan M. Taylor and Jeffrey G. Williamson, 2003, Globalization in Historical Perspective, University of Chicago Press for the NBER, Chicago. Feis, Herbert, 1930, Europe the World’s Banker: 1870-1914, Yale University Press, New Haven. Goetzmann, William N. and Philippe Jorion, 1999, “Re-Emerging Markets” Journal of Financial and Quantitative Analysis, 34(1), March 1999, pages 1-32. Hobson, John A., 1902, Imperialism: A Study, Gordon Press Reprint, 1975, New York. Lenin, Vladimir I., 1917, Imperialism: the Highest Stage of Capitalism. International Publishing Company reprint,1969, New York. Tables taken from the website: http://www.marxists.org/archive/lenin/works/1916/imp-hsc/. Lowenfeld, Henry, 1909, Investment an Exact Science, The Financial Review of Reviews, London. Rajan, Raghu and Luigi Zingales, 2001, “The Great Reversals: the Politics of Financial Development in the 20th Century,” NBER Working Paper 8178. Roy, William G., 1999, Socializing Capital, Princeton University Press, Princeton. Tauber, Rudolf, 1911, Die Börsen der Welt, Verlag für Börsen-und Finanzliterature A.-G. The Economic Report of the President, 2004, U.S. Government Printing Office, 2004.

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Figure 1: Geographically Distributed Investments Producing 4% Per Annum. From Lowenfeld, Henry, 1909, Investment an Exact Science, The Financial Review of Reviews, London.

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Notes i See, for example, Bordo, Taylor and Williamson (2003) ii A 1909 British guide to international investing, by Henry Lowenfeld, Investment an Exact Science, lists investable countries as : Great Britain, India, Canada, Australia, Tasmania, New Zealand, Straits Settlements (Singapore), Belgium, Denmark, Germany, Holland, Norway, Russia, Sweden, Switzerland, Austria, Bulgaria, France, Greece, Italy, Hungary, Portugal, Roumania, Spain, Serbia, Turkey, Japan (Tokio and Yokohama), China (Shanghai and Hong Kong), Cape Colony, Natal, Transvaal, Egypt, U.S. (New York), Mexico, Argentine, Brazil, Chile, Peru and Uruguay. iii Lenin draws these figures from the Bulletin de l'institut international de statistique, t. XIX, livr. II, La Haye, 1912. Data concerning small states, second column, are estimated by adding 20 per cent to the 1902 figures. iv A complete database of the securities on the London Stock Exchange is available for download at the website of The International Center for Finance, Yale School of Management, www.icf.yale.edu. v Richard M. Sherman and Robert B. Sherman, 1964, soundtrack to Mary Poppins. vi A complete database of shares traded on the St. Petersburg Exchange is available for download at the website of the International Center for Finance, Yale School of Management, www.icf.yale.edu. vii See Goetzmann and Jorion (1999) viii The Times, Saturday, December 15, 1917, p. 12 Issue 41662 col. F ix See The Economic Report of the President, 2004 Table B-12. x Economists Rajan and Zingales have developed their own theory to explain the great advances and declines of global financial markets that is based on a model of entrenched domestic financial interests resisting incursions by foreign investors. It is, different and perhaps more sophisticated than the model presented here, although the two are not necessarily contradictory. xi See, for example Roy (1999)

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